Infrastructure development and geopolitical tensions push oil prices higher in third quarter

Houston, 30 October 2013

Newsroom

With new infrastructure opening up logistical bottlenecks between the Midcontinent and Gulf Coast regions, and mounting instability in the Middle East and North Africa, US and global oil prices pushed higher in recent months, according to the latest US quarterly outlook by EY’s Oil & Gas Center.

However, not all industry pricing trended upward; despite a moderately strong cooling season, production increases and competitive coal prices drove US and North American natural gas prices down. The US economy continued growing, despite the 16-day government shutdown. The impact on oil and gas included mainly market uncertainty, reflected in slightly fluctuating oil prices as well as decreased trading activities due to the fact that the EIA was not able to publish its weekly petroleum inventory report.

“Despite signs of growing optimism for the US economy, continued political uncertainty around budget and debt issues could erode the recent gains we’ve seen in consumer and business confidence,” says Marcela Donadio, the EY Americas Oil & Gas Leader. “This could have significant implications not only for the US economy, but also for global energy demand and equity markets as others look to see how the US government resolves the budget issues.”

Oil Allegations of chemical weapons use in Syria and a new wave of instability in Iraq, Libya, Egypt and Yemen pulled global crude oil prices up by an average of $5-10 per barrel in the third quarter. In North America, the massive infrastructure build-out has removed many logistical roadblocks that have kept inland crude substantially undervalued over the last few years.

Global oil demand growth remains modest, but strong growth in non-OPEC crude production – particularly from the US – is putting substantial pressure on OPEC to keep its production in check.

Gas Despite a seasonal retreat in prices, US gas market fundamentals remain fairly balanced, with gas storage at near normal levels for this time of year. Coal-to-gas switching at utilities has moderated somewhat, but producers can anticipate a strong gas-fired heating season.

While a substantial number of proposed LNG exports remain under review by the US Department of Energy, two additional US LNG export projects received full export permits in the third quarter. Both of the newly-approved projects are re-purposed LNG import facilities, including the first proposed export project not located along the Gulf Coast. Meanwhile, buyers across the globe, particularly in Asia, have become increasingly attracted by the potential for lower-cost LNG supply from the US and Canada.

Downstream With the substantial increases in transportation capacity, many of the structural crude supply imbalances are waning. Additionally, the increasing efficiency of the transportation system did not help margins for US refiners, which suffered in the third quarter. EY believes the transportation capacity impact will continue to keep downward pressure on margins, especially for coastal refiners, through the end of the year.

Oilfield services Total global rig counts continue to trend low year-over-year, primarily due to the relatively weak US drilling activity. Data from IHS Herold show that global upstream spending growth was fairly strong in 2012, increasing by 12%. But growth is slowing, particularly in North America, where operators have been re-directing capex spending from dry-gas plays to oil and/or liquids-rich gas plays. At the same time, oilfield services cost pressures are increasing, as is service intensity.

Going forward, EY expects to see North American onshore and offshore rig activity to improve. At the global level, the firm sees the OFS segment focusing on new plays that are deeper, more remote and more complex, with an increasing focus on deepwater drilling.

Transactions Global oil and gas transactions activity was again slow, with only a small volume increase over Q2, which was the worst quarter for oil and gas deal activity in almost three years. For the first nine months of 2013, the number of deals is down by almost 10%. While year-over-year total deal value is up almost 11%, this is due to several large Russian deals which have dominated the transaction landscape, and is not a reflection of increased industry transactions globally. With that said, the stage is set for at least a modest rebound in transaction activity in 2014 given the activity we are seeing in the pipeline and the availability of both equity and debt capital in the marketplace.

Source: IHS Herold, Inc.

“While the US continues to enjoy resurgence in oil and gas activity, this has not been the case for transactions,” notes Jon McCarter the Oil & Gas Transaction Advisory Services Leader for Ernst & Young LLP. Deals in North America are down in both value and volume from 2012. “The global transactions landscape hasn’t fared much better. Overall volume was down, with activity dominated by fewer, large transactions.”

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.